2020 (8) TMI 301 - AT - Income Tax

Disallowance being commission on sales paid to the shareholder Director(s) - whether CIT (A) has failed to appreciate that the shareholder director was entitled to dividend in view of accumulated profit available and the commission so paid is clearly prohibited by the provisions of section 36(l)(ii)? - HELD THAT - There is no dispute on fact that the Directors were given commission for promoting sales and increasing the sale of the company by their efforts and over the period of time the assessee's turnover has increased manifold and also the profit. Similar commission paid to the Directors in terms of same agreement has been allowed in the past by the AO himself in orders passed in scrutiny proceedings u/s 143(3). If directors in terms of Board resolution are entitled to receive commission for rendering services to the company and if it was in terms of employment on the basis of which they have been rendering services, then such remuneration/commission is part and parcel of salary. It is also not disputed that TDS has been deducted on such commission as salary. Otherwise also, the payment of dividend is made in terms of Companies Act, 1956 which has to be paid to all the shareholders equally and dividend is basically a return of investment and not salary or part thereof. As decided in AMD METPLAST P. LTD. 2011 (12) TMI 320 - DELHI HIGH COURT payment of dividend is made in terms of the companies Act, 1956, Dividend has to be paid to all shareholders equally. This position cannot be disputed by the Revenue. Dividend is a return on investment and not salary or part thereof. Herein the consideration in the form of commission which, was, paid to Ashok Gupta was for services rendered by him as per terms of appointment as a managing director. Similar view was taken on the concept of bonus payment following the judgment of AMD Metplast (P.) Ltd. (supra) in the case of CIT v. Carrer Launcher India Ltd. 2012 (4) TMI 440 - DELHI HIGH COURT has decided this issue in favour of the assessee, interpreting section 36(1)(ii) - Decided against revenue.

Summary

Issues:
Disallowance of commission paid to shareholder Directors under section 36(1)(ii) of the Income-tax Act, 1961.

Analysis:
The appeal was filed by the Revenue against the order passed by Ld. CIT(A) for the Assessment Year 2012-13, challenging the deletion of disallowance of commission paid to the shareholder Directors. The Assessing Officer disallowed the commission based on section 36(1)(ii) as the Directors were entitled to dividends due to accumulated profits. The company had reserves and surplus, leading to the disallowance of the entire commission paid.

Before the Ld. CIT(A), it was argued that the commission was based on sales turnover and approved by the Board of Directors. The company entered into agreements with the Directors outlining their functions and duties, for which they were paid additional compensation based on turnover. The company's turnover had increased significantly, justifying the commission payments. The Ld. CIT(A) noted that similar commissions were allowed in previous assessment years and relied on relevant case laws to support the allowance of the commission.

During the proceedings, the Assessing Officer and the counsel for the Revenue contended that commission paid to Directors who were shareholders should not be allowed under section 36(1)(ii). On the other hand, the counsel for the assessee strongly supported the order of Ld. CIT(A) citing precedent judgments.

The Tribunal found that the commission was paid for promoting sales and increasing company turnover, which had indeed grown substantially over time. The payment of similar commissions in previous years under the same agreement was also noted. The Tribunal emphasized that if Directors were entitled to receive commission for their services, it should be treated as part of their salary. The Tribunal referred to a High Court judgment which clarified that dividend payments are returns on investment and not part of salary. Based on the legal precedents and factual circumstances, the Tribunal upheld the order of Ld. CIT(A) and dismissed the Revenue's appeal.

In conclusion, the Tribunal dismissed the appeal of the Revenue, affirming the decision to allow the commission paid to the shareholder Directors based on the binding judicial precedent and interpretation of section 36(1)(ii) of the Income-tax Act, 1961.